GASB 68 Pension Reporting for the CPA FAR Exam

Overview of GASB 68

GASB Statement No. 68, Accounting and Financial Reporting for Pensions, establishes standards for how state and local government employers account for and report pensions. It applies to the government-wide financial statements and proprietary fund financial statements of employer governments that participate in defined benefit pension plans. GASB 68 is a key topic on the government accounting portion of the CPA FAR exam.

Types of Pension Plans Under GASB

GASB distinguishes among three types of defined benefit pension plans based on administration:

• Single-employer plans: Provide benefits to employees of only one government.
• Agent multiple-employer plans: Pool investments for administrative purposes but maintain separate accounts for each employer. Each employer's share of the plan is distinct.
• Cost-sharing multiple-employer plans: Pool all contributions and obligations. Benefits are not attributed to individual employers, and the risk is shared among all participating employers.

Net Pension Liability

The centerpiece of GASB 68 is the requirement for employers to report a net pension liability (NPL) on their balance sheet (statement of net position). The NPL is calculated as:

Net Pension Liability = Total Pension Liability (TPL) - Plan Fiduciary Net Position (Plan Net Position)

The total pension liability is the actuarial present value of projected benefit payments attributed to past periods of employee service, using the entry age normal cost method. The plan fiduciary net position represents the fair value of the plan's assets available to pay benefits.

Discount Rate

The discount rate used to calculate the TPL is a blended rate. To the extent that projected benefit payments are expected to be covered by plan assets (projected contributions and projected investment earnings), the long-term expected rate of return on plan investments is used. For the portion not expected to be covered by plan assets, a high-quality municipal bond rate (20-year, tax-exempt general obligation) is used. If the plan is well-funded, the entire discount rate will be the long-term expected rate of return.

Pension Expense Components

Pension expense under GASB 68 includes several components, which differ from the FASB pension expense components:

1. Service cost: The portion of the change in the TPL resulting from current-period employee service.
2. Interest on the TPL: The increase in the TPL due to the passage of time.
3. Projected earnings on plan investments: Reduces pension expense (based on the long-term expected rate of return, not actual return).
4. Changes in benefit terms: Recognized immediately as pension expense in the period of the change.
5. Amortization of deferred outflows and inflows: Differences between expected and actual experience, changes in assumptions, and differences between projected and actual earnings are deferred and amortized into pension expense over specified periods.

Deferred Outflows and Deferred Inflows of Resources

GASB 68 introduces deferred outflows and deferred inflows of resources related to pensions. These are not assets or liabilities but are reported separately on the statement of net position. Items that are deferred include:

• Differences between expected and actual economic experience: Amortized over the average remaining service life of plan participants.
• Changes in actuarial assumptions: Amortized over the average remaining service life of plan participants.
• Net difference between projected and actual earnings on plan investments: Amortized over a fixed five-year period.
• Employer contributions made after the measurement date: Recognized as a deferred outflow and applied to the NPL in the next reporting period.

Cost-Sharing Plans: Special Considerations

For cost-sharing multiple-employer plans, each employer reports its proportionate share of the collective NPL, pension expense, and deferred outflows and inflows. The proportionate share is typically based on the employer's contributions relative to total contributions from all employers. Changes in the employer's proportion between measurement dates result in additional deferred outflows or inflows, amortized over the average remaining service life.

Required Supplementary Information (RSI)

GASB 68 requires extensive RSI, including a schedule of changes in the employer's NPL and related ratios (presented for up to 10 years as data becomes available) and a schedule of employer contributions showing the actuarially determined contribution, actual contribution, and the difference. This information helps users assess the long-term sustainability of the pension funding.

Exam Preparation Tips

• Know the NPL formula: Total Pension Liability minus Plan Fiduciary Net Position.
• Understand the blended discount rate: long-term expected return where funded, municipal bond rate where not.
• Deferred outflows increase pension expense when amortized; deferred inflows decrease it.
• Investment return differences are amortized over five years; experience and assumption changes are amortized over the average remaining service life.
• Employer contributions made after the measurement date are a deferred outflow, not a reduction to the NPL until the next period.